Friday, August 22

Unfinished Superannuation Business

One of the more colorful of Australia’s politicians was Paul Keating; Treasurer for Australia in the 1980’s who went on to become Prime Minister. Keating was quick witted, one not to mince words, irreverent but unusually dedicated. He publically admitted his lack of economics knowledge when first he became Treasurer and in those early days often looked rather bleary eyed and tired, from all night and early morning sessions poring over the latest treasury forecasts.

Personally I always thought he was a very clear thinker and one of the very few politicians whose communications were fluid and smooth; devoid of the usual irritating ums and arrs or awkward pregnant pauses. He was recently interviewed by Kerry O’Brian of the ABC and if you read the transcript I think you will be surprised by that same style. Click here to read the transcript.

Keating instituted many economic reforms; more so than anyone before or after him as he unshackled our labour and banking practices strangled in regulations and allowed the Australian dollar to float. But his most significant reform was to establish a universal superannuation scheme.

Keating’s grand vision was to encourage every citizen to save for retirement, and in the process create a huge pool of investment capital to enrich the nation. At that time superannuation existed for only about 50 % of the workforce and the remainder relied on somewhat meager government payments of the old age pension. Keating’s idea was the aged pension would become increasingly irrelevant as it was quickly superseded by universal superannuation. His vision was that every citizen would have a post retirement income equivalent to preretirement, paid for from a pension out of each persons superannuation account.

It began with the employer paying in a compulsory 4 %( initially Government funded) for all workers and eventually the minimum guaranteed percentage rose to 9%. Many people personally paid in another 5% or even matched the 9% contribution.

It was Keating’s intention to legislate for the 9 % to be increased to 15% but such intentions was denied after he lost the 1996 federal election and subsequently the elected Liberal Coalition showed no interest in increasing the percentage. Actuarially over a working lifetime, assuming just 15% and investing to give real rates of return you will finish up with sufficient funds to accomplish the goal of self funded retirees.

Superannuation remains unfinished business which hopefully will be rectified by the Rudd Government.


susan said...

It's a plan I wasn't familiar with but the idea sounds similar to company pension plans and IRA's in this country. The stumbling block to retirement plans in the US is the necessity of funding medical coverage. Full Medicare (at age 65) still means just 80% of medical care is paid and the figure I've seen that retired people over that age need to have banked is $300k. This is quite obviously an impossible amount for most retirees so there's little choice but to keep working as long as is physically possible. The personal savings rate in the US is noted to be mostly in low or even negative numbers.

I hope your current government does endorse the 15% superannuation contribution. I know you have a national health care system and with that in place it would allow mature people to contribute to the social well being of the country and at the same time allow room in business for young people with new careers and families.

What will happen here in the coming 20 years remains to be seen.

Scaramouche Jones said...

Keating also goosed the Queen. Points for that :)

Zee said...

I don't trust banks, I don't trust the government - retirement is solely a ten letter word to me.
I can grow food on my land, have my own water - that is my retirement. I guess I am lucky.

Seraphine said...

it's funny how someone
with no economic experience
becomes Treasurer
until you realize how little
economists and financiers
seem to know.

Seraphine said...

if i spend 15% more
than I earn each year
until I retire,
i must be american.

my home equity
america's superannuation
will bail me out,
if the bank doesn't
foreclose first.

Cart said...

You and DK always trip me up on these finance issues :( I should put more time into understanding. Oh well, one day...

Seraphine said...

once you begin to
cart, it changes again.

Gary said...

Hey, we could use him here. We have a government who'd like to see everyone for themselves, without the government help.

Interesting piece.

lindsaylobe said...

Hi Susan, Scaramouch Jones, Zee, Sera, Cart & Gary
Thanks for your comments.

Susan ~Very similar but we do have 100% vesting, e.g. the funds remain always yours and are not contingent on any factor such as years of employment.
Hopefully fresh political faces in the USA will eventually introduce a universal health scheme funded on a levy on taxable income which would reduce the present duplication; the opportunity for fraud and a halt to uncontrolled runaway costs.

SJ - I remember that incident- Keating also wants us to become republic.

Zee –I think at times it can also be fun growing your own food! It’s been estimated a family can almost become self sufficient in vegetables and fruit given only 900 square metres of land!

Sera- your best investment is the one you make in yourself and or your own business, but do put some saving aside for your future!

Cart - Paying in additional 6% into super savings in lieu of reduced tax makes more sense as it creates saving and enriches the nation?

Gary – Governments become ideologically driven and forget their funding is from the community who expect encouragement and sensible policies for all. Harper is a ‘Howard’s man’; on most issues as you have experienced. I notice Finance Minister Jim Flaherty budgeted $2.3 billion surplus is now looking very shaky. I also notice the Governments generated a $4.25 billion windfall from the just-completed wireless spectrum auction.

Best wishes

Michael Manning said...

As always, I enjoy learning something new here! This certainly stirs the imagination!!

Seraphine said...

let's see. if i save a dollar a day at eight percent annual interest, minus 40% for tax and factoring four percent inflation, plus $120 a barrel for oil, each dollar i save will be worth a (negative) eight cents when i retire.

Zee said...

you sound like a pessimistic fashion designer today, Sera. Can't blame you though...

lindsaylobe said...

Hi Michael & Sera & Zee

Michael-Thanks for your visit and comment


I am not sure of the limits on your 401K plans over there but I think you will find your able to deduct any contributions you make from your gross salary (reducing your overall tax rate and tax payment) rather than paying for it out of your net after tax salary as you have implied. Contributions into such a fund would also enjoy tax free status in terms of the earnings whilst in the fund.

Have you noticed Oils now down to $108.28,

Best wishes